Are cash gifts taxable?

[Jon]

Hi,
Would I have to pay tax on money given to on a monthly basis me by a
relative? I am in the upper tax band.
Many thanks,
Paul

 

[Ronald Raygun]

Would I have to pay tax on money given to on a monthly basis me by a
relative? I am in the upper tax band.

No, not if they are genuine gifts.

But inheritance tax liability may arise if the gifts are substantial
and not out of the relative's income to the detriment of their,
lifestyle, i.e. if they are a sneaky way of siphoning off funds to
reduce a future IHT bill.

 

[DP]

But inheritance tax liability may arise

If the donor lives for more than seven years after the gift (the likely
case), no IHT will be payable. If they die in the next seven years, the
recipient is liable for the tax. The tax is calculated at a maximum of 40%
of the value of the estate, with the first £255k being exempt. The tax is
reduced on a sliding scale from 40% to zero if the gift was made in the
seven years before death.

The most tax efficient way to transfer funds to a relative is to gift them
while the donor is still alive, but the gift must be final. If there are
strings attached (e.g. transfer the deeds of a house into a relative's name
while the donor still lives there or loan money on the understanding that,
should the need arise, it will be repaid) the IHT will not be avoided and
other taxes could be incurred.

___
www.itall.com

 

[Ronald Raygun]

If the donor lives for more than seven years after the gift (the likely
case), no IHT will be payable.
Correct.

If they die in the next seven years, the
recipient is liable for the tax.
Potentially.

The tax is calculated at a maximum of 40%
of the value of the estate, with the first £255k being exempt. The tax is
reduced on a sliding scale from 40% to zero if the gift was made in the
seven years before death.

This "sliding scale" stuff is widely misunderstood. If a gift of £255k
is made and the donor dies 6 years later, leaving a further £255k, most
people think the 2nd lot of £255k is exempt, and tax due on the first
£255k is tapered down to a fifth, resulting in an IHT bill of £20.4k,
but in fact it's the first lot that's exempt, leaving the whole of the
second lot taxable at the full 40%, resulting in a bill of £102k.

 

[john boyle]

This "sliding scale" stuff is widely misunderstood. If a gift of £255k
is made and the donor dies 6 years later, leaving a further £255k, most
people think the 2nd lot of £255k is exempt, and tax due on the first
£255k is tapered down to a fifth, resulting in an IHT bill of £20.4k,
but in fact it's the first lot that's exempt, leaving the whole of the
second lot taxable at the full 40%, resulting in a bill of £102k.

Now where have I seen that before..........................

 

[Robert Laws]

This "sliding scale" stuff is widely misunderstood. If a gift of £255k
is made and the donor dies 6 years later, leaving a further £255k, most
people think the 2nd lot of £255k is exempt, and tax due on the first
£255k is tapered down to a fifth, resulting in an IHT bill of £20.4k,
but in fact it's the first lot that's exempt, leaving the whole of the
second lot taxable at the full 40%, resulting in a bill of £102k.

Yes this is widely misunderstood and widley (even in books) explained
incorrectly. The IHT people choose to take the earliest gifts off
the nil band first and as it's the tax that's tapered not the gift the
taper is applied to the zero tax.

But, where in the various acts of parliament does it say that they can
choose to offset the gifts in that order? Did they simply decide to
do it that way? In many cases the taper is completely useless. It
only have any effect if the gifts total more than the nil band.

Robert

 

[Ronald Raygun]

Yes this is widely misunderstood and widley (even in books) explained
incorrectly. The IHT people choose to take the earliest gifts off
the nil band first and as it's the tax that's tapered not the gift the
taper is applied to the zero tax.

But, where in the various acts of parliament does it say that they can
choose to offset the gifts in that order? Did they simply decide to
do it that way? In many cases the taper is completely useless. It
only have any effect if the gifts total more than the nil band.

I've no idea where it says so, but I'm sure it must do. The IR don't
have the power to make up such potentially contentious rules off their
own bat without statutory authority.

Its probably in the Inheritance Tax Act 1984.
Unfortunately HMSO online goes back only to 1988.

 

[Tim]

... it's the tax that's tapered not the gift ...

If the gift were tapered rather than the tax, then this would allow estates
greater than the nil-band to be passed without any IHT at all, before the 7
years were up ...

[Eg if a gift of £510K were given (suppose this was "to be" the entire
estate) and then death occurred half-way though the 7-year period - and this
were tapered by 50% to £255K, then no tax would be payable. Obviously, the
tax rules only want to allow zero IHT for larger estates if there has been a
clear 7 years since the gift were made!]

 

[Ronald Raygun]

If the gift were tapered rather than the tax, then this would allow
estates greater than the nil-band to be passed without any IHT at all,
before the 7 years were up ...

You present that as though suggesting that would in some way be absurd.

[Eg if a gift of £510K were given (suppose this was "to be" the entire
estate) and then death occurred half-way though the 7-year period - and
this
were tapered by 50% to £255K, then no tax would be payable. Obviously,
the tax rules only want to allow zero IHT for larger estates if there has
been a clear 7 years since the gift were made!]

Except of course halfway through the 7 year period taper would only
be 20%, not 50%.